IP: Effective terms of use agreements

To reduce the risk of transacting business online, virtually all website owners place language on their sites that includes, among other things, forum selection and choice of law clauses, limitations on damages and alternative dispute resolution requirements such as mediation or arbitration. This protective language often is presented in the context of “Terms of Use,” an “End User License Agreement,” or “Terms of Service.” Regardless of what the agreement is called, to effectively reduce their risk, website owners need to make certain that a valid agreement exists with the website users.

A court recently addressed the enforceability of a website’s Terms of Use when Zappos.com Inc. tried to require arbitration of a class action consumer dispute. The plaintiffs, who were Zappos.com customers, claimed their personal information was hacked from the Zappos site. Individual plaintiffs sued in federal district courts across the country seeking relief under state and federal statutory and common law for damages resulting from the security breach. Zappos filed a motion to compel arbitration pursuant to its website Terms of Use. The Terms of Use further stated that: “We [Zappos] reserve the right to change this Site and these terms and conditions at any time,” and “ACCESSING, BROWSING OR OTHERWISE USING THE SITE INDICATES YOUR AGREEMENT TO ALL THE TERMS AND CONDITIONS IN THIS AGREEMENT, SO PLEASE READ THIS AGREEMENT CAREFULLY BEFORE PROCEEDING.”

The Nevada District Court, where the cases were consolidated for pretrial proceedings, denied Zappos.com’s motion to compel arbitration. In doing so, the court distinguished between “browsewrap” and “clickwrap” (or “click through”) agreements. A browsewrap agreement is one in which a website owner seeks to bind website users to terms and conditions by posting the terms somewhere on the website, usually accessible through a hyperlink located somewhere on the website. A clickwrap agreement requires users to affirmatively manifest asset to the terms, for example by clicking an “I ACCEPT” button.

The Zappos.com Terms of Use was a browsewrap agreement with no evidence that the plaintiffs had actual knowledge of the agreement. Therefore, the validity of the agreement depended on whether the website provided reasonable notice of the terms of the contract. In holding that the Zappos.com Terms of Use did not provide reasonable notice, the court reasoned that:

“The Terms of Use is inconspicuous, buried in the middle to bottom of every Zappos.com webpage among many other links, and the website never directs a user to the Terms of Use. No reasonable user would have reason to click on the Terms of Use, even those users who have alleged that they clicked and relied on statements found in adjacent links, such as the site's ‘Privacy Policy.’”

The court further held that because the Terms of Use granted Zappos the unilateral right to revise its arbitration clause, the contract was illusory and therefore unenforceable.

Although most courts will, with a wink and a nod, find a meeting of the minds when users affirmatively manifest their assent to website terms and conditions, it is incumbent on the website owners to provide the court with some cover. Ideally, website users should be required to take an affirmative action, such as checking or unchecking a box, to provide evidence that they are aware of and consent to the Terms of Use. Absent such an affirmative action, the website owner must be certain to provide users with “reasonable notice” of the terms of the agreement. Failure to do so will prevent the website owner from the protections contained in the website Terms of Use. Finally, as the Nevada court makes apparent, courts disfavor providing the website owner the unilateral right to revise material terms of the agreement.

Contributing Author

Michael Smith

Michael T. Smith is of counsel at Birch Stewart Kolasch & Birch. He has practiced in the intellectual property field since 2001, focusing his practice...